The Sanctions Mess

It you are living in Russia you are under sanctions, sanctioned. It sounds terrible, like being incarcerated for ever in concrete blocks of shame and reduced to the level of North Korea as an ‘adversary’ of America. But if one considers the sanctions more carefully, which this article attempts to do, the possibility arises that they may be equally as bad, if not worse, for America as for Russia.

So what are these new dreaded sanctions? Are they the final straw, the ones that finally send us foreigners living in Russia back to where we came from, tail between our legs and humbly asking to sign on at the nearest unemployment office? The first foreigner I spoke to at Moscow’s ‘Chicago Prime’ bar two days ago, did not know that any new sanctions had been imposed. “Sanctions? What sanctions?” He asked. Others offered a myriad of different opinions, there is no one overriding view so far, and that is bad news for those who created this already infamous, ominously titled document: ‘Countering America’s Adversaries Through Sanctions Act.’

What are the New Sanctions?

So far, I have discovered that: Rosneft, Gazprom Neft, Novatek, Transneft and two other major Russian energy companies will not be able to borrow large sums of money from US banks for more than 60 days and that Russian State banks can be financed for only 14 days, not 30 as previously. US companies are not allowed to invest and supply equipment and services for Russian oil and gas export pipeline projects worth over $1million or an aggregate cost exceeding $5m in the space of one year. The new bill forbids participation in privatisation of Russian state property and enterprises if the investment is over $10m and facilitates the enrichment of Russian civil servants, their relatives or close friends. The new bill adds new sanctions on Russia’s defence and intelligence sectors aimed at making it more difficult for the country to export weapons.

Although Russian investments into the US economy are not large, comparatively speaking (see below), the new sanctions charge the Secretary of the Treasury, in consultation with the Director of National Intelligence and the Secretary of State to submit a report in 180 days on ‘Oligarchs and Parastatal Entities of the Russian Federation’ with the aim of sanctioning those who have any connection with President Putin and his family. Oligarchs such as Alexander Galitsky,  Alisher Usmanov and Yuri Milller who hold significant interests in US high tech enterprises, and many others might possibly be listed. The effectiveness of sanctions on oligarchs and those who invest in the Russian privatisation process as well as sanctions against Russia’s defence and intelligence sectors cannot be commented on yet in any meaningful way. However, it is possible for us to hold views on the sanctions against companies working in Russia’s oil and gas sector and financial sanctions.

RBK reported that limiting credit periods doesn’t change anything because American banks have already almost completely stopped crediting Russian ‘sanctioned’ Russian businesses.  Most points in the new bill merely codify into law sanctions already imposed by Obama, but there are sections which may affect European companies. Gazprom, already sanctioned up to the hilt, and still alive, will most likely find refinancing more difficult but not impossible. ‘Nord Stream 2’ is estimated to cost $9.5 billion and raising capital in eastern markets, most likely in China, will cost roughly .5% more, according to Raiffeisenbank analyst Andrey Polischuk (reported in RBK). The sanctions will also, apparently, hit Russian LNG projects at a time when Russia is trying to increase its presence in that compressed market.

Art Franczek the President of the American Institute of Business and Economics in Moscow  said… “The most serious blow will be dealt to the construction of ‘Nord Stream 2’ pipeline. It seems that the latest sanctions will not stop the project but will complicate its completion.” Also in Moscow, Alexis Rodzianko President of AmCham told ‘Ruptly’:  “So far, the signing of the sanctions into law has not affected our work and the work of business in any way. All those sanctions that were legal already existed and to date, nothing has changed much.” He added that attempts to oust Russia from Europe’s energy market had failed in 1970s and said they would also fail now.

Europe’s Reaction

European business people who work in Russia are perhaps already hardened to sanctions. It would not be an exaggeration to say, however,  that at the time of writing this article, that the EU is in shock, and there are signs of confusion. Jean-Claude Juncker, president of the European commission, said on the 2nd of August that he was satisfied that the US had limited the reach of sanctions against Russia… “As a result [of US-EU negotiations], a significant proportion of the intended sanctions against Russia have been dropped. Moreover, US Congress has now also committed that sanctions will only be applied after the country’s allies are consulted. And I do believe we are still allies of the US”. Juncker seemed to contradict himself when he told the German broadcaster ARD, also on the 2nd, that: “We must defend our economic interests vis-à-vis the United States. And we will do that.”

Individual EU countries have reacted differently. On July 31st, (before the new bill was signed by Trump) the Guardian reported:  the German foreign ministry has suggested that the new sanctions a US business plot to promote liquefied natural gas exports to Europe. The French government questioned the international legality of the bill. Jean-Claude Juncker, the president of the European commission, was so incensed he called for retaliatory measures (although the EU later stepped back from that threat).

It seems that these sanctions, which come at a time when Europe is in a state of bewilderment in how the US administration views the EU in general, are driving a wedge between Europe and America in a way that the Americans, incredibly, did not foresee. The ‘Nord Stream 2’ pipeline project was supposed to be built with the help of German, French and other companies much to the chagrin of the Baltic countries and Ukraine. The Baltic countries do not wish a pipeline to run near their shorelines, let alone encourage energy dependence of western Europe on Russia, and Ukraine stands to lose transit revenues, as well as the possibility of retaliating against Russia by cutting off supplies of Russian gas to western Europe. Germany is now furious as it sees the sanctions as a threat to its own energy security.

The above-mentioned sanctions do not directly apply to European companies, companies such as OMV, BASF, BP, Eni and Shell engaged in energy related projects with Russia. But they could do. Art Franzcek commented: “European companies will not be sanctioned directly but the US can block their corresponding accounts in the US because most of the transactions are done in dollars. We have elections coming up in Germany in September. It is now in Merkel’s interest to stand up to the Americans, if she doesn’t that is a sign of weakness, and Shultz will knock her down. We also have the Italian elections coming up next year.”

How is the New Bill Going to be Implemented?

The semantics used in the US media as regards implementation are full of conditionals: ‘although the president could waive those sanctions,’ or ‘The bill would give the Trump administration the option of imposing sanctions on companies helping develop…’ The President declared after he signed the new bill that it is ‘seriously flawed’ and ‘clearly unconstitutional.’ Teams of lawyers may be hired to prove that the bill is or isn’t constitutional, and this may delay implementation.

Trump also said that the new bill will ‘drive China, Russia, and North Korea much closer together.’ Well, as for Russia and China being driven close together, Trump is making presumptions about issues that he is, perhaps (syllogism) hardly qualified to have an opinion about. Andrew Korybko, a Moscow based political analyst speaking in a strictly private capacity said: “If we look at the idea of traditional allies, that infers some kind of obligation to each other. Russia and China don’t have that. They have coordination, they serve each others’ self-interest. It just so happens that their self-interests overlap and work out to their multilateral advantage.” Russia and China may seem to be working together now but there is no obligation on either side to coordinate their foreign policies indefinitely.

Will the sanctions push Russia, China and N. Korea together?, Andrew said: “Yes the sanctions will push all three closer together, but N. Korea is kind of the odd man out, because it is seen as troublesome; it violates UN sanctions and regulations which have been agreed on by both Russia and China. N. Korea is creating a problem which is giving the US a pretext to deploy force to that region which is in itself a huge headache for Russia and China.” One wonders, with respect, if President Trump understands foreign policy at all.

The bill looks very robust, but there appears to be considerable ‘wiggle’ room as to how it is implemented, if it is implanted. Adam Smith, the ex-director of multilateral affairs in Barack Obama’s national security council, quoted in The Guardian says: “There are delay tactics. The executive does not have to disobey a law in order not to execute it, …The president can direct the blow in a way more in line with his foreign policy desires.” This means that there will be more bitter fights with Congress over Russia sanctions.

The Reaction in Russia

It may come as some surprise that most Russians were not about to jump off buildings or emigrate when they heard that President Trump signed the bill. Rather they have become more disillusioned with their own government for for getting Russia into this mess in the first place, or disillusioned with American clumsiness and hypocrisy, with considerably more people holding the latter view. Perhaps the most damaging view, for America at least, is that a clear differentiation is opening up in people’s minds between Europe and the US for the first time since Gorbachev’s days.

The Western press is reporting that Russia has reacted against the new sanctions by ordering the US to cut its diplomatic staff by 60%, and taking back a dacha and an embassy warehouse in Moscow. Our press is perhaps forgetting that the number of Russian diplomats in the US was reduced to 455 after former President Obama, in December 2016, expelled 35 Russian diplomats in retaliation for alleged election hacking. Whether such hacking took place or not is not the subject of this article. From the pieces of information that have surfaced in the Russian and western press, it seems clear now that as of 2013, the US embassy and its three consulates in Russia  employed about 1200 people. 900 were hired locally, and they will not be forced to leave their own country. President Putin’s instructions equalise the number of American diplomats working in Russia to the number of Russian diplomats in America. This is not an anger-driven retaliatory move, indeed it can be argued that no clear retaliatory moves to the sanctions have yet been taken by Russia. It seems that Russia is still hanging on to the hope that things will change on Capitol Hill, that Trump will apply to the Supreme Court perhaps. This may be a wild assumption, Russians seem to be more optimistic than they perhaps should be.

President Putin announced his decision after Congress voted but before President Trump signed the sanctions into law. Reductions to the US diplomatic corps do not come into effect until September, which provides enough time, theoretically, to amend or soften provisions and to provide some leverage in negotiations.

The critical observer can also detect a lack of a uniform opinion within the Russian administration. Whilst Russia’s prime minister Dmitry Medvedev said on his facebook page that the sanctions were tantamount to a “full-scale trade war… The hope that our relations with the new American administration would improve is finished,” Russia’s new ambassador to the United Nations, Vasily Nebeznya indicated that Moscow would continue to seek common ground with the Trump administration. “We will not relent on finding ways and means to cooperate with our partners, including the United States,” Nebeznya said. Dmitry Peskov, Putin’s press secretary said: “Russia will not answer to the new sanctions”.

It would be difficult to accept the possible conclusion that Medvedev is talking about a trade war between Russia and the US. There isn’t much. Fortune in March reported: ‘US goods exports to Russia totalled just $11 billion in 2013, equivalent to less than 0.1% of US GDP. US goods imports from Russia totalled $27 billion, just under 0.2% of US GDP. The direct financial linkages between the United States and Russia are also small. According to (the Treasury Department) Russians hold $139 billion in US Treasury securities and virtually no US corporate bonds or equities — at least directly. Russian direct investment in the United States also appears minimal. In the other direction, US residents hold $70 billion in long-term securities and $14 billion in direct investment in Russia. Meanwhile, the European Union is far more reliant on Russia for its economic health, as much of the E.U.’s supply of natural gas comes from Russian gas fields…” According to official figures, EU-Russia trade alone in 2016 totalled 191 billion Euros.

Perhaps what is of more importance, is whether the EU can muster 28 votes to continue sanctions against Russia early next year, as continuation of sanctions has to be endorsed unanimously.  Russia has very little to fight back with apart from closing the doors completely to the West, and this is, so far, not an option, furthermore, it may be tantamount to admitting defeat. A quick look at world history might possible reveal that Russians don’t do that, they are much like Americans.

One sector that remains unscathed by sanctions so far, is US-Russia cooperation in the space industry. This is perhaps the one area that Russia could inflict harm. However, if such cooperation is curtailed, that means choking Russia of an extremely profitable and long-standing source of income. Russia still provides the Americans with RD-180 engines, made by Energomash near Moscow. America has been purchasing these engines for the last 16 years, they are seen as being cheap and efficient at least compared to the multi-billion-dollar price tag of developing an all-American engine. Russia could also hit back at the US defence industrial base which has focussed contracts with Russian companies. One has to look for the word ‘waiver’ in the new sanctions to see the areas which the US is concerned about. The new sanctions thus supply the Russians with a road map of where to hit out against the US.

Meanwhile, the Americans are clearly not pleased about the decision to limit their diplomatic activities and have made it clear that visas for Russians will take longer to be processed. The Washington Post reported Michael McFaul, the former US Ambassador to Russia, predicting that the cuts to local consular staff would mean that Russians will have to wait “weeks, if not months” for visas.

Creating an enemy is useful for all states everywhere as paranoia and xenophobia is a fantastic, time tested vote winner. The new sanctions have made it easier to get the populations of both sides to believe such hype. In this context, sanctions are brilliant but as tools to change countries’ political course, next to useless; particularly in today’s multipolar world. In this case though, it appears that the sanctions have not been well thought through and may speed up Europe’s disenchantment with the US, something which is directly in apposition to US global interests. The fact that the sanctions were overwhelmingly voted for on a bipartisan basis in Congress only frightens the author of this article, because of the level of political; and cultural distance that has opened up not only between the US and Russia but between the US and Europe. Perhaps also between insanity and sanity.

Quietly, two other major policy changes have been initiated by the US. Firstly, Trump has ended covert arms supplies to Syrian rebels,  which is a highly significant step in itself. Secondly Rex Tillerson appears to be about to end ‘democracy propagation’ abroad. These policy shifts cannot be directly linked to the new sanctions bill, however they demonstrate that either the US administration is in absolute chaos, or that Trump is sticking to his overall election campaign foreign policy stance despite everything.

Whether the sanctions are good or bad depends on your political alliances, and the author has no mission to influence the reader in any direction. One thing I think can be said, is that the world has changed in that American policies are no longer accepted en masse by Europeans, and this may well be the greatest challenge to the American international cause since the last World War. The world has indeed changed in a week.

6.8.17

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